One of the worst financial mistakes you can make is living above your means. It doesn’t matter what your salary is, you should be spending less than you make in order to get ahead financially.
Unfortunately, living above your means is a very common problem in our society. It’s easy to buy things on credit and to get a false sense of financial security.
Living within or below your means doesn’t force you to deprive yourself. You simply need to prioritize and take control of where your money is going.
In this article, we’ll look at some warning signs that may indicate you’re living above your means. If several of these warning signs are evident in your own life, consider making some changes in order to improve your financial situation.
Signs That You’re Living Above Your Means
Here are the signs that you should look out for.
1. You Don’t Know How Much You Spend Each Month
If you’re not sure how much money are you spending each, there is a good chance that you’re actually spending more than you think. It’s really easy to underestimate the total of all of your expenses.
Some people cringe at the thought of a budget and prefer to not think about how much money they’re spending. Ignorance about your expenses won’t make the problem go away, it will only make it worse in the long-term.
The good news is, this problem is easy to fix. It only takes a small amount of effort to track your expenses and stay on top of your finances. You can even use a free app like Mint or Personal Capital to help make tracking expenses easier.
Personal Capital is a free financial app, and right now they’ll even give you a $20 Amazon gift card for free, just for trying their app. All you need to do is sign up here and then link at least one financial account. Once you have an account linked to personal capital, you’ll get an email with the gift card details.
2. Your Credit Card Balances are Increasing
Credit card debt is one of the biggest signs of living beyond your means. Those expenses that you can’t really afford will typically go on a credit card, so checking your credit card statements is an easy way to see if you are living beyond your means.
Hopefully, you either have zero credit card debt, or your balances are at least decreasing. Zero debt is, of course, ideal. But simply having some credit card debt isn’t necessarily a sign that you’re currently living beyond your means. You may be working hard to eliminate the debt, so the trend of your balances is probably a better indicator than simply the presence of debt.
3. You Don’t Have an Emergency Fund
The emergency fund is an important part of your financial plan. Money in your emergency fund can be used to pay your bills in the case of something unexpected, like the loss of your job, major health issues, or unexpected family emergencies.
Without an emergency fund, you’ll be likely to rack up debt in these types of situations. You may also risk foreclosure, eviction, having a car repossessed, or the inability to pay your other monthly bills.
How much you should have in an emergency fund will depend on your work and family situation, but in general, you should have at least enough money to cover your living expenses for 3-6 months. If you’re in a higher-risk situation, like if you’re self-employed or supporting a family on a single income, you should be at the high end of that range.
The money in your emergency fund should be easy to access quickly. CIT Bank offers high-yield savings and money market accounts that will allow you to earn a nice interest rate on your emergency fund money, while still making it very easy to access. The interest rates offered by CIT Bank are more than 20x the national average!
4. You’re Not Saving at Least 10% of Your Income
According to a study done by GoBankingRates, 57% of American adults have less than $1,000 in savings (source). This is both shocking and concerning.
At a minimum, you should be saving at least 10% of your take home (after tax) income. Really, 15-20% would be more ideal, but 10% is a good place to start.
Of course, saving is often associated with planning for retirement, and investing into a 401(k) or Individual Retirement Account (IRA) is a great choice. Many employers offer a 401(k) plan and will match a certain percentage of your pay, based on what you contribute. If this is an option for you, be sure you are contributing enough to take advantage of the full match offered by your employer. Missing out on that money is like turning down a raise.
Saving money may seem impossible, but it’s probably a lot more realistic than you think. Contributions to a 401(k) or Traditional IRA can reduce your taxable income, so it can also decrease the amount that you pay in taxes.
If finances are tight and you’re having trouble finding ways to save and invest, see this list of frugal living tips that will give you plenty of practical suggestions. You’ll be able to cut your expenses and have more left over to save.
Blooom is offering a free review and analysis of your 401(k). Just login to your 401(k) and within a few minutes you’ll see some detailed reports, along with suggestions for improving your results. Get your free 401(k) analysis here.
5. You Don’t Have Any Money Left at the End of the Month
If you’re constantly running out of money before the end of the month, or before your next paycheck, that’s a sign that you are living above your means.
If you’re on top of your finances and living within a budget that is appropriate for your income, you shouldn’t consistently have issues with going through your money too quickly. The emergency fund and savings are important for those times when something comes up unexpectedly.
6. You Worry About Small Expenses and Being Able to Pay the Bills
Money is a serious cause of stress for a lot of us, but if you find yourself worrying about not being able to pay your bills, it could be a sign that you are not managing your money effectively. Likewise, if you worry even about small expenses, you may need to make some adjustments.
Living within your means won’t make you immune to money worries, but it should help you to prevent fear about your electricity being shut off, or the inability to pay other essential bills.
7. Your Credit Score is Below 650
Your credit score is often an indicator of your financial health. It’s very possible to have a low-to-moderate income and still have a high credit score. And it’s also to possible to have a high income and a low credit score. How you manage your money is more important than how much you make.
The average credit score for Americans is 675, according to Experian. If your score is below 650, it may be a sign that you are living above your means or not managing your money as well as you should be. A below average credit score can hurt your chances for credit and increase the interest rates you’ll pay.
Credit Sesame will give you your credit score for free every month!
8. You Spend More Than 28% of Your Income on Housing
As a general rule of thumb, you should not be spending more than 28% of your gross income on housing expenses. Your housing expenses could be rent, or the total of your monthly mortgage payment, property taxes, and homeowner’s insurance.
Creditors and lenders will often use the 28/36 rule in determining your eligibility for a loan or credit. The rule states that you should not spend more than 28% of your monthly income on housing, or more than 36% percent of your income on the total of housing and other debt.
One of the biggest causes of living above your means is a house or apartment that is too expensive. Houses are often seen as status symbols, leading many people to stretch on what they can truly afford.
9. Other People’s Opinions Influence Your Financial Decisions
If you are too concerned about what others think of you, it could lead you to make bad financial decisions. Don’t buy a house, car, clothes, gadgets, or anything else to impress other people. Don’t take expensive vacations or run up big tabs at the bar because of an appearance that you want to create.
In order to manage your money wisely and effectively, you’ll need to do what is best for you. Don’t be afraid of what people might think, and don’t worry about impressing others by spending money.
What You Can Do About It
Ok, now that we’ve looked at some of the warning signs, you may be wondering what you should do if you see several of these signs when you look in the mirror. If the warning signs are indicating that you may have an issue, here are a few steps that can help to correct the situation.
1. Create a Budget
The most important thing you can do to get your spending under control is to create a budget that will dictate how you spend your money. Creating a budget can sound intimidating, and you may not know where to start.
Don’t worry. Creating a budget doesn’t need to be hard. See my article How to Create a Budget That Works and my list of budget categories to help lead you through the process. You can also enter your email address below to download a free budget spreadsheet template that can be used to quickly and easily create your own budget.
Creating a budget is a great first step, but you’ll also need to track your expenses in order to know that you are staying within the budget.
2. Start an Emergency Fund
If you don’t already have an emergency fund, start one today. You can use an online bank (my wife and I use CIT Bank) and quickly create a savings account or money market that will be used to hold your emergency fund. Work on adding money to it each month until you have enough to cover 3-6 months of living expenses.
If you already have an emergency fund, but it’s not big enough to cover 3-6 months of living expenses, prioritize adding to it each month.
3. Choose a Debt Payoff Approach
If you currently have debt, aside from a mortgage, you should make debt payoff a top priority. Once you have no more monthly payments on credit cards, student loans, personal loans, car loans, or other debt, you’ll have a lot more money that you can save each month. Paying off debt will also mean that you can stop wasting money each month on interest payments.
Two of the most common approaches to paying off debt are the debt snowball and the debt avalanche. With the debt snowball approach, you will attack your smallest debts (in terms of balance) first. With the debt avalanche approach, you will pay off the debt with highest interest rates first. See this article for a comparison of the two methods.
Once all your other debt is paid off, you may choose to pay off your mortgage, but that’s really a matter of personal preference.
4. Automate Your Savings
Earlier in this article, we looked at the common problem of not saving enough. One of the best things you can do to prevent this problem is to make your savings automatic.
The easiest way to do this is to set up 401(k) contributions through your employer’s HR office. Your 401(k) contributions will be taken out of each paycheck automatically before you even see the money. That means that you won’t have the opportunity to forget to save it, or the possibility of spending the money instead of saving.
You can also automate transfers to a savings account. If your paycheck is direct deposited to your checking account, you may have the option of splitting the direct deposit between two accounts. For example, you could have 10% sent straight to a savings account. If that is not an option, you could also set up a monthly or bi-weekly transfer to be automatically made from your checking account to your savings account.
Qapital is a free app that makes it fun and easy to automate your savings and reach your goals.
5. Start a Side Hustle
Last but not least, one way to improve your financial situation is to make more money. There are many different ways to make money aside from relying on your job. A side hustle can be a great way to make money to help with paying the bills, or to give yourself more money each month to save.
Regardless of your situation, there are things you could be doing to make extra money. My favorite side hustle is to start a blog, but here are a few other options that are very effective as well:
- Creating niche websites
- Selling private label products on Amazon
- Flea market flipping
- Flipping furniture for profit
- Become a transcriptionist
- Freelance writing
How you manage your money is far more important to your financial health than how much money you make. The signs discussed in this article will help you to know if you are living above your means, and if so, you can follow the steps listed to correct the issue.
The key is to recognize the issue that you’re having. Don’t ignore it and hope that it goes away. Anyone can take care of their money with a little bit of effort and some desire to set yourself up for a better future.
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